How will the financial crisis affect insurance and risks?

In class we discussed that one way to hedge against risk is to purchase insurance. An expert Dr. Robert Hartwig, answers questions about insurance weaknesses and issues with the current financial crisis. He predicted that we will see a lot of financial legislation and regulation from President Obama's administration, which has been seen to be true. We have mortgage legislation to help limit the foreclosures. We have also seen financial bailout legislation for struggling companies. Dr. Hartwig predicts that the insurance and entire financial services industry will be more conservative after the eventual improvement in the market. I think that this conservatism is what disasters help put into place. We need bad times to recognize the good times and to prevent future disasters. This crisis ccould help encourage more risk management.

People are worried that more and more companies will have committed the same risk mistakes as AIG and will also go bankrupt. We have seen companies fail, and we have seen more and more asking for bailout money. But, insurance companies operations are different from those of AIG and will not likely suffer the same fate. Banks and other companies separated the bearing of risk from the underwriting of risk. With this method, comes a huge moral hazard. Insurance companies do not operate this way and are not subject to acting in ways that cause more risk. As in our class discussion, you cannot simply take large risks with large returns to quickly turn your company around. If you have been losing money with small risks, you will most likely fail with large risks as well. This is how companies have been putting themseleves down, by taking last minute huge risks at the chance of making large returns to make up for loss. These companies just end up bankrupt and costing themselves large amounts of money, which could have been prevented through risk management.

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